Question

First The sales department of a cellular phone company pays its salespeople $1,500 per month plus 25 percent of each new subscriber’s first month’s billings. A new subscriber’s first-month bill averages $80. Salespeople work 160 hours a month (four weeks at 40 hours per week). If salespeople work more than 160 hours per month, they receive $12 per hour for hours in excess of 160. Sales leads for the sales department are generated in a variety of ways—direct mailings to potential customers who then call to speak to a salesperson, lists of prospective customers purchased from outside marketing firms, and so forth. The manager of the sales department reviews potential leads and assigns them to particular salespeople who contact them. The manager of the sales department is expected to oversee the time spent by each salesperson per assigned lead and to approve overtime requests to work beyond the 40 hours per week. Each new customer added requires, on average, 2 hours of salesperson time to make the sale. Last month, the sales department was budgeted for eight full-time salespeople. However, because of a new ad campaign, an additional salesperson was hired and overtime was approved, bringing actual hours worked up to 1,580. The department added 725 new customers. Required:

a. Prepare a performance report comparing actual performance to budgeted performance using a static budget based on eight salespeople and no budgeted overtime.

b. Prepare a performance report comparing actual performance to budgeted performance using a flexible budget based on nine salespeople selling 725 new accounts.

c. Discuss when you would expect to see the report prepared in part (a) used and when you would expect to see the report in part (b) used

Answer 1

a)

Actual budget :

9 employees worked * 160 hours per employee = 1440 hours

Customer = 725

Sales = 725 * $80= $58,000

Salaries =$1500 * 9 employees =$13500

Commissions = 725 * $20 = $14500

Commissions rate = 25 % of new subscriber’s billing amount = $80 * 25/100=$20

Over time :                                                                                                                    

1580 hours worked – 1280 budgeted hours =300 hours – 160 hours for extra one employee as ninth employee worked in actual = 140 hours considered as over time

Over time rate = $12

Over time salaries = $12 *   140 = $1680

Static budget:

8 employees worked * 160 hours per employee =1280 hours

Customers = 640 customers

1280hours / 2 average hours = 640 customers

Sales = 640 * $80=$51,200

Salaries = $1500 * 8 employees = $12,000

Commissions =640 *$20=$12800

Commissions rate = 25 % of new subscriber’s billing amount = $80 * 25/100=$20

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b)

Flexible budget:

9 employees worked * 160 hours per employee =1440 hours

Customers = 725 customers

Sales = = 725 * $80= $58,000

Salaries = $1500 * 9 employees = $13,500

Commissions =725 *$20=$14500

Commissions rate = 25 % of new subscriber’s billing amount = $80 * 25/100=$20         

c) When I saw static budget first then I saw flexible budget it indicates there was no extra actual revenues has raised by the company but extra actual expenses made as shown. Sales revenues and all expenses amount except overtime are same figures used for actual and flexible budget.